GBP/USD Exchange Rate Climbs as UK Inflation Holds Steady

The GBP/USD exchange rate is trending higher today, following the release of the UK’s latest inflation figures.

<h2>Pound (GBP) Bolstered by Upbeat GDP Figures</h2>

The Pound initially soared against the US Dollar on Tuesday as the UK published its latest Consumer Price Index.

According to the data published by the Office for National Statistics (ONS), inflation held at 3% in January, against expectations that it would dip to 2.9%.

The report showed that weaker fuel prices were offset by a strong than expected uptick in recreation and service sector prices.

The main reason for Sterling’s gains however was on the expectation that it will force the Bank of England’s (BoE) hand on raising interest rates again at some point this year, with many observers suggesting a May rate may be on the books.

Amit Kara, head of UK macroeconomic forecasting at thinktank NIESR said;

‘UK January CPI inflation was unchanged at 3.0%. Inflation has likely peaked and is set to return to the target rate of 2.0% over the next eight quarters.

Our forecast assumes a rate increase by the MPC in May and every 6 months after that until it reaches 2%.’

However Sterling was forced to cede some of its gains later in the day as analysts warned that the gap between inflation and wage growth is likely to persist well into 2018, likely dragging on economic growth due to the resulting fall in consumer spending.

John Hawksworth, chief economist at PwC said;

‘We do expect inflation to fall back gradually over the course of the year, but this will be a slow process given that global commodity prices have generally been on an upward trend in recent months. The squeeze on real earnings may therefore persist until late in 2018, which will continue to dampen consumer spending growth this year.’

<h2>US Dollar (USD) Weakened by US Budget Proposals</h2>

The US Dollar meanwhile remains on the back foot today after markets soured on the US currency yesterday following the release of Donald Trump’s Budget proposals for 2019.

Trump’s proposals envision government spending rising to $4.4 trillion next year, much of which will go towards his tax cuts and increased military spending plans.

Analysts suggest that should Congress approve the proposals this will lead to an annual deficit of around $1 trillion, despite his plans to also drastically slash welfare spending.

However possibly most disappointing for investors was the outlining of Trump’s infrastructure spending plans, with the President only earmarking $200bn over the next 10 years, with further funds set to be raised by different state governments and the private sector.

Critics were quick to label the plans ‘a scam’ and a long way off what he promised in his election campaign.

House Democratic leader Nancy Pelosi said;

‘After a full year of empty boasts, the president has finally unveiled a puny infrastructure scam that fully fails to meet the need in America's communities.’

<h2>GBP/USD Exchange Rate Forecast: US Inflation Expected to Slide</h2>

Looking ahead movement in the GBP/USD exchange rate is likely to be driven by the release of America’s own CPI figures on Wednesday.

Economists forecast that headline inflation will have dipped from 2.1% to 1.9% in January, with core inflation also expected to slide.

This may derail hopes of a March rate hike from the Federal Reserve, as the US central bank has frequently warned that stubbornly low inflation may hinder its plans to continue raising interest rates.

Meanwhile the Pound may build on today’s gains later in the week with the release of the UK’s latest retail sales figures, as analysts predict that sales growth will have rallied sharply from -1.5% to 1.5% in January.